Taxation of SS

[Tiger8693]

It really stinks about taxation of SS.

Have seen a couple of advertised local seminars on planning for, and minimization of this, but am always skeptical of an annuity sales pitch or something. May just go with my guard up to see if I can learn anything.

This whole retirement planning thing is tedious and time consuming. I can't imagine what people that are not as detail oriented do. See an FA and pay I guess.

 

[Souschef]

I had a broker offer me a QLAC annuity to minimize RMD's. I checked into it and found that at age 85 you might get your principal back
There is no way to beat it. Because of my RMD's I will always have SS taxed.

 

[target2019]

Use TurboTax or similar tax program. Plug in your specifics, and there ya go.
If you have last years version, there is a What-If form, also.

 

[VanWinkle]

It really stinks about taxation of SS.

Have seen a couple of advertised local seminars on planning for, and minimization of this, but am always skeptical of an annuity sales pitch or something. May just go with my guard up to see if I can learn anything.

This whole retirement planning thing is tedious and time consuming. I can't imagine what people that are not as detail oriented do. See an FA and pay I guess.

The brkts for SS taxation have never been inflation adjusted. That is the main problem I see in the current system.

 

[gauss]

Someone please correct me if I am wrong, but aren't employer contributions to SS paid with pre-tax dollars (for the employer).

If true, at least 1/2 of SS payments should be taxable to the recipient if it is treated like any other investment. Any "growth" in your SS would also be taxable so the ratio should be above 50%.

-gauss

 

[VanWinkle]

Someone please correct me if I am wrong, but aren't employer contributions to SS paid with pre-tax dollars (for the employer).

If true, at least 1/2 of SS payments should be taxable to the recipient if it is treated like any other investment. Any "growth" in your SS would also be taxable so the ratio should be above 50%.

-gauss

Don't run for office, the truth will never get you elected!!

 

[gauss]

Yeah - I am often the spoiler in the room....

 

[pb4uski]

It really stinks about taxation of SS. ....

Tiger, I disagree. I'm not sure why anyone would think that SS retirement benefits should be tax-free.

There are numerous parallels of after tax retirement contributions that are later substantially taxed.

The closest one to SS would be annual investments into a deferred annuity that was then annuitized for life at age 62 or 66 or 70... a large portion of the annuity benefits received would be taxable. Same thing for a non-deductible IRA.

Let's say that you invested $5,000 annually in a non-deductible IRA from age 25 to 65. At a 7% average annual return, at age 65 you would have about $1 million on $200,000 of contributions. If you the converted that to a life annuity, you would receive about $64k a year in benefits. Your basis would be about $9k... your $200k of contributions divided by 22 year remaining life according to the IRS annuity tables. So $55k of the $64k in benefits would be taxed... that's 86%.

Another example... take your FRA SS retirement benefit and annualize it. Then divide the annual amount by 4% to get the dollar amount needed to provide that annual benefit under the 4% rule. The take your SS contributions from page 3 of your SS statement and divided it by the dollar amount computed above... I get 15% for me... meaning that ~15% of what I receive is a return of the taxes that I paid and the other 85% relates to taxes paid by my employers (that I was never taxed on) and growth (that I was never taxed on).... so I have no reason to object to 85% of my SS being taxed.

 

[Tiger8693]

I'm not arguing about the 'political" aspect of it, just said that it sucks. I'm for no cap on FICA, with a continual decrease in return so that SS can be extended, but I know a lot of people feel otherwise.

Still, I hope for a system or way to mitigate the impact, much like strategies to use subsidies for pre-Medicare HI.

 

[Fedup]

The break is in state tax for me. Assume you can live on $70k of income, you get zero tax on SS from state. So that’s where I focus to minimize my tax. Roth conversion now will minimize that in the future.

 

[Tiger8693]

The break is in state tax for me. Assume you can live on $70k of income, you get zero tax on SS from state. So that’s where I focus to minimize my tax. Roth conversion now will minimize that in the future.

Yes, this will play a role in my future "relocation" efforts. Well, that and sunshine.

 

[RunningBum]

The best way I've heard is to eliminate RMDs by converting your IRA to a Roth before you take SS. Tax efficient investing is another way, using index funds that throw few or no CG distributions. Use Spec ID on your mutual fund cost basis so if you sell investments, you can sell losers and smaller gainers.

Maybe there are ways with annuities or other vehicles but you have to watch that you aren't costing yourself more than you are savings.

I haven't looked too much at this because even with index funds, the dividends I get along with a small pension will almost certainly make my SS taxed to the limit.

 

[Spock]

Seems very inefficient to give somebody tax $
and then turn around and charge them a tax on those $.
But it is the parasitic bureaucratic way.

 

[W2R]

In retirement I am enjoying glorious oceans of free time that I never had while working. Honestly I just do not waste my precious time getting upset about taxes, though YMMV.

This whole retirement planning thing is tedious and time consuming. I can't imagine what people that are not as detail oriented do. See an FA and pay I guess.

I think a lot of those who are mathematically challenged, do not plan at all. They just work until they can't any more, and then live on SS and whatever else they can get. I suppose those who don't qualify for SS probably are homeless, eat at soup kitchens and beg on street corners. My understanding is that a lot of our nation's elderly live in extreme poverty.

For planning purposes, some others (including a few forum members) simply assume a retirement tax rate that they know is a bit higher than they will actually experience. Then when they retire and encounter a tax rate less than that, they can happily blow the excess on fun and discretionary spending.

 

[gerntz]

I'm for no cap on FICA, with a continual decrease in return so that SS can be extended, but I know a lot of people feel otherwise.

Regardless of the money's purpose, it's a pretty amazing thing to say you're for a 6.2% tax rate increase above $132K salary plus the same on employer for daring to pay above that amount. Now there's a real job and economy killer. Net, your position is noting but political.

Raising retirement age is much simpler.

 

[gerntz]

Seems very inefficient to give somebody tax $
and then turn around and charge them a tax on those $.
But it is the parasitic bureaucratic way.

FICA payments aren't taxes. They're insurance.

 

[Fedup]

It’s a part of income distribution, nothing to do inefficiency. You only know that at tax time.

 

[audreyh1]

Seems very inefficient to give somebody tax $
and then turn around and charge them a tax on those $.
But it is the parasitic bureaucratic way.

Not everyone is taxed on SS income. It depends on their other income.

 

[travelover]

Invest in real estate and depreciate it enough every year to offset any income. Claim most of the value is in the appliances and parking areas so you can accelerate that depreciation. That's how the cool people do it.

 

[USGrant1962]

FICA payments aren't taxes. They're insurance.

The Social Security Administration disagrees. https://www.ssa.gov/OACT/ProgData/taxRates.html

You can argue whether the payments are insurance - they are called that but there is no binding insurance policy - but the payments are certainly a tax.

 

[Spock]

FICA payments aren't taxes. They're insurance.

If its collected under threat of arrest and imprisonment, its "insurance" in name only and a convoluted definition of the term.

 

[Tiger8693]

Regardless of the money's purpose, it's a pretty amazing thing to say you're for a 6.2% tax rate increase above $132K salary plus the same on employer for daring to pay above that amount. Now there's a real job and economy killer. Net, your position is noting but political.

Raising retirement age is much simpler.

Again, trying to avoid the political, just stating my concern and proposal for ensuring continued SS. Like it or not, SS is redistribution, to ensure our country provides at least some "security" for those that are.... less fortunate, or less responsible, whichever way you look at it.

Back to my intent of the thread, I am looking at some conversion where possible, and just plain buildup of after tax savings. Might be able to help things with that, at least until RMD's kick in.

 

[marko]

I'm confused.
If we're talking about paying tax on one's SS benefit, I'm having a hard time getting worked up about paying taxes on SS income as it is:
1) generally a very small percentage of the income most of us here take in,
2) only taxed on 85% of it and,
3) in many cases, there's no state tax.
"Free" money? Ok! Oh, I have to pay a bit of tax on it? OK!

If we're talking about FICA, well, no fighting that one! I was a high-income earner but, as much as I hate paying taxes, would have had no problem with making the cap open ended. It was taken Jan 1 and I never missed it, until late February when I'd get extra money in my check, having reached the cap.

The first case reminds me of when I got my first luxury company car. Someone said: "Don't get too happy, you're going to have to pay taxes on that lease payment".
I said: "So, I get to drive an $80,000 car, with gas and insurance and it's going to cost me, $2K in taxes?...OK"

 

[Tiger8693]

I'm confused.
If we're talking about paying tax on one's SS benefit, I'm having a hard time getting worked up about paying taxes on SS income as it is:
1) generally a very small percentage of the income most of us here take in

Early on, its less than 20% of retirement income, later, it is close to 50% of retirement income (for DW and I).

If it sounds like I am whining about having to pay tax on "free money", sorry. Just fretting on the impact to our disposable income in retirement.

 

[gauss]

If you just found this out, I can understand your reaction.

It was quite an epiphany to me when I realized that anger/hurt are often the results of when something didn't go as planned and an element of unexpected surprise is involved.

I know I had that feeling when my pension accruals were terminated after ~ 20 years while at Megacorp.

This is often the case with personal relations with others too.

-gauss